Sunday, February 24, 2013

The Tension Between Personal Responsibility and Paternalism - and the Issue of Fiduciary Standards

Throughout American society there exists a tension between two fundamental sets of beliefs. On one side is the staunch believe that freedom of contract is fundamental, that persons should take responsibility for their own actions, and if persons act stupidly (and enter "dumb bargains") then so be it.

On the other side is the belief that there are certain things so important to our society, such as the retirement security of our fellow Americans, that individuals with a great disparity in knowledge compared to the purveyors of products they deal with should possess a trusted guide, and that government should enforce this by specifying that such guides should act in a paternalistic manner (i.e., keeping best interests of the client foremost).

Both sides often ignore the fact that there is room for both. Not everyone needs nor wants a trusted advisor. Yet, those who desire a trusted advisor (which I suspect is the vast majority of Americans) want an advisor who truly stands in the shoes of the client, at all times. And they desire to be able to "judge a book by its cover" - i.e., when someone uses a title which denotes a relationship of trust and confidence, they want to be able to have confidence that such person is acting in their best interests.

Yet, due to failings in our government, the role of the trusted advisor versus the product salesperson has blurred. Those who deal at arms-length (in which caveat emptor is the standard of protection, augmented to some degree by certain required disclosures) have moved into "trust-based selling," in essence disguising themselves as trusted advisors. Despite early warnings from the SEC and FINRA (f/k/a NASD), as evidenced by statements made in 1941 and 1963, salespeople hold themselves out as trusted advisors, yet then deny fiduciary status.

There are many economic interests who desire to continue this morass of confusion (from the standpoint of the consumer). These interests do not desire to accept the higher standard of conduct of a fiduciary. They are fearful of a profession, for with it comes professional-level compensation, a move toward hundreds if not thousands of professional practices, and a move away from the distribution systems of today with their substantial extraction of rents. In essence, the broker-dealer business model of today, an anachronism, is challenged at its very core by these developments.

Hundreds of millions of dollars have flooded into Washington, DC, in recent years, and tens of millions of dollars more each year, as Wall Street firms and insurance companies attempt to wield their influence to prevent the evolution toward a fiduciary model.

At a minimum, Wall Street and the insurance companies seek to prevent common-sense measures which would permit consumers to clearly detect the type of relationship (arms-length, or fiduciary in which they find themselves. They desire to continue their practice of "trust-based selling" - an oxymoron. Wall Street's broker-dealers, investment banks, and the insurance companies desire to perpetuate the great deception of consumers today. To paraphrase Prof. Angel and others, "To hold oneself out as a trusted financial advisor, without accepting the duties which flow from fiduciary status, amounts to fraud."

Far more devious, however, is Wall Street's greater aim - its desire (via FINRA, aided by SIFMA and FSI and the many broker-dealer firms who are members of these organizations) to take over and kill the independent fiduciary investment advisory profession. While FINRA has recently indicated that its "SRO over RIAs" ambitions is not its key legislative priority today, there is no doubt that it continues to lay the groundwork for another run at Congress in the future.

The battle lines have been drawn. These battles exist, however, along several fronts - DOL/EBSA, SEC possible rule imposing fiduciary standards on brokers who provide personalized investment advice, the regulation and oversight of RIAs, state legislatures and state securities regulators and even in the courts (where state common law fiduciary standards are applied to relationships based upon trust and confidence).

As these battles continue, independent investment advisers and consumer groups must continue to explain the truth of the situation in which consumers find themselves today ... mass confusion, caused in significant part by deceptive marketing practices which regulators (SEC, FINRA) have refused to clamp down upon. Continued education of the SEC Commissioners, their staff, and members of Congress and their staffs is required, especially given the high degree of turnover in D.C.

While this is a challenge, it is also an opportunity. It is the opportunity to correct the misleading sales practices which deceive too many Americans. It is the opportunity to more clearly and correctly draw the line between arms-length investment and insurance product sales and trusted investment advice. It is the opportunity to restore the trust of individual Americans in the providers of investment and financial advice. And it is the opportunity to formalize a profession of true, fiduciary financial and investment advisors.

To my colleagues already engaged in this effort, continue to persevere. To my colleagues who desire to get involved, do so - but with the understanding that these battles will not quickly be won.

Our fellow Americans should be able to tell a product salesperson from a trusted advisor. For those Americans who desire an advisor to act on their behalf, these Americans deserve a profession of trusted financial and investment advisors.

Indeed, America itself deserves all of the benefits - increased savings, greater investment in the capital markets, lowered cost of capital for firms, and greater economic growth - such a development would foretell.

2 comments:

This is a very inspiring article on the subject of the fiduciary status. I graduated college in 2010 and recently started my financial planning career. I wish I knew the whole story of fiduciary status before graduating because I learned it first-hand in the real world by working at a "big-time" insurance company and also working for a boutique Registered Investment Adviser where I also passed the CFP(R) exam. There is a BIG difference in both models and I believe there should be a divide as it would help the average American most.

Great post. I am sure you probably don’t remember me, but I was the national scholarship winner at the NAPFA conference for 2012 and Susan Johns read portions of my essay to kick off the conference. You and I also had a long discussion in Chicago about using my union organizing background to assemble opposition to the Bachus-McCarthy Proposal last year. I instantly retweeted your link to this post not only because of the quality of your writing but because it was similar to one of the topics I wrote on this week for my blog. Mine was a narrative of the time I opened a business account and the banker told me that I would be competing against the bank’s “financial advisor” who I promptly informed her was a salesman, not an advisor and as such, no competition would commence. Please check it out when you get a chance and let me know what you think.

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Ron A. Rhoades, JD, CFP® sailed across the Atlantic on a tall ship, performed in theme parks and road shows in Europe and America as a Disney character, rowed on a championship crew team, marched in the Macy’s Thanksgiving Day Parade, marched in competition with a state-champion rifle drill team, undertook a solo one-week trip into the Everglades, escorted numerous celebrities around Central Florida, performed as a “Tin Man” at a mountaintop theme park called “The Land of Oz” in Beech Mountain, NC, and served as a stage manager and talent scheduling coordinator for entertainment productions at Walt Disney World. And then he graduated college.

Since then, Ron Rhoades earned his Juris Doctor degree, with honors, from the University of Florida College of Law, which was preceded by a B.S.B.A. from Florida Southern College. Ron Rhoades has 30 years of experience as an attorney, with nearly all of those years substantially devoted to estate planning, tax planning, and retirement plan distribution planning. Ron also has over 15 years as a personal financial adviser. He was a principal with an investment advisory firm where he served as its Director of Research and Chair of its Investment Committee.

The author of numerous articles published in financial industry publications and several books, Dr. Rhoades has been quoted in numerous consumer and trade publications, and has been interviewed on Bloomberg's "Masters in Business" radio show segment. He writes occasional articles for industry publications. Ron is a frequent speaker at local FPA chapter meetings and national conferences in the financial planning and investment advisory professions.

Ron Rhoades was the recipient of The Tamar Frankel Fiduciary of the Year Award for 2011, from The Committee for the Fiduciary Standard, as he “altered the course of the fiduciary discussion in Washington.” He was also named as one of the Top 25 Most Influential persons associated with the investment advisory profession in 2011 by Investment Advisor magazine, and was voted to the “Sweet 16 Most Influential” in Wealth Management’s 2013 “March Madness” competition. Dr. Rhoades was also named as one of the "Top 30 Most Influential" members in NAPFA's 30-year history in 2013. This blog was also called one of the "Top 25 Most Dangerous" in financial services.

Ron A. Rhoades, JD, CFP® became Program Director for the Financial Planning Program (B.S. Finance, Financial Planning Track) at Western Kentucky University's Gordon Ford School of Business in July 2015. He provides instruction to highly motivated, exceptional undergraduates students in such courses as Applied Investments, Retirement Planning, Estate Planning, and the Personal Financial Planning Capstone course. He has previously taught courses in Insurance & Risk Management, Employee Benefits, Money & Banking, Advanced Investments, and Business Law I and II.

Ron also serves on the Steering Committee of The Committee for the Fiduciary Standard, on whose behalf he frequently travels to Washington, D.C. to meet with policy makers in Congress and in government agencies regarding the application of the fiduciary standard to personalized investment advice.